Consider these facts:
- NRCo owns Forco. Forco owns 100% of a Canadian operating subsidiary (CanOpco). The paid-up capital (PUC) of the shares of CanOpco is nominal.
- NRCo sets up a new Canadian company (CanHoldco), and CanHoldco acquires the shares of Forco for shares of CanHoldco. The PUC of the CanHoldco shares is equal to the FMV of the shares of Forco.
- Forco is wound up into CanHoldco, and the shares of CanOpco are transferred to CanHoldco. S. 212.1(1) does not apply on the transfer.
- CanOpco pays a taxable dividend to CanHoldco in an amount equal to its retained earnings. CanHoldco deducts the dividend from its taxable income under s. 112(1). CanHoldco pays the same amount to NRCo as a reduction of PUC.
What is CRA's position on whether GAAR will apply if the above planning is carried out:
- Pre-acquisition – i.e. NRCo injects equity into CanHoldco, and CanHoldco acquires Forco from an arm's length vendor (assume CanHoldco can't acquire CanOpco directly because NRCO also wishes to acquire Forco's other assets);
- Post-acquisition – i.e. NRCo acquires Forco from an arm's length vendor, then after a number of months transfers Forco to CanHoldco in exchange for shares of CanHoldco; and
- Non-acquisition – i.e. the NRCo, Forco, CanOpco structure has been in place since the inception of CanOpco's business activities, and NRCo transfers the shares of Forco to CanHoldco in exchange for shares of CanHoldco?
Response
: Given that in all three cases, a new Canadian corporation (CanHoldco) is "inserted" to establish cross-border PUC so as to enable surplus of CanOpco to be extracted from Canada, CRA would consider the application of GAAR in each case. CRA stated:
The GAAR Committee has determined that the GAAR applies to cases involving "Post-acquisition" and "Non-acquisition" planning as described above. The GAAR will apply to treat the return of PUC paid by CanHoldco to NRCo as a distribution of a taxable dividend subject to Part XIII withholding tax. The GAAR Committee has not recently addressed the "Pre-acquisition" tax planning case described above. ... If the acquisition of Forco by CanHoldco in all three scenarios occurred after March 28, 2012, section 212.3 would generally apply.